Tesla and SolarCity: Brilliant, or SunEdison Pt. 2?

Tesla runs the risk of falling into the Solar sand trap, as history proves that vertical integration is a failed business model.

This past week, Silicon Valley darling, Tesla Motors, recently announced their bid to buy SolarCity, the country’s largest residential solar panel installer. The ambitious move would turn the electric car company into a fully vertically-integrated clean energy company, which would control all operations over a full range of products; from electric vehicles to battery storage and rooftop solar. In the words of the Tesla Team, they’d would be the “world’s only vertically integrated energy company offering end-to-end clean energy products to their customers.”

Not so fast, said investors. Shortly after Musk made the announcement, Tesla’s stock plummeted 11%. With their ambitious 2017 Model 3 rollout still uncertain, taking on SolarCity’s massive debt dowry comes at a frightful time. While both companies are growing rapidly, neither are profitable yet; with Tesla having lost $889 million and SolarCity another $769 million in 2015. SolarCity generated negative $2.6 billion in free cash flow in 2015, and it has $1.5 billion in debt coming due by 2017. Despite the solar developer’s likelihood of wrecking Tesla’s balance sheet, Musk’s master plan to verticalize looks more like a disguise for his cousin’s rescue. Investors aren’t so easily fooled and are, “likely to view this transaction as a bailout for SolarCity and a distraction to Tesla’s own production hurdles,” according to Bloomberg.

Solar investors would know, as the still-fresh wounds of SunEdison proves that expansion is fraught with risk. When SunEdison unveiled plans to buy Vivint Solar around this time last year, they foiled at the idea. The deal involved taking on too much debt, and expanded far off from the company’s core development business. As a result, stocks plummeted in a downward spiral for nearly a year after until SunEdison paid the ultimate price: bankruptcy.

In contrast, Apple Computers, the most highly valued brand in the world, operates completely differently. Rather than manufacturing their own technology components, Apple buys its parts in the open market. It does not have a battery manufacturing factory, even though every one of their products has a rechargeable battery. All of this production is outsourced to companies that specialize in high quality, contract manufacturing. Tesla already has a manufacturing problem, as they’ve been late to deliver every new model they’ve released since the launch of their first vehicle (which had been delayed three times) back in 2008.

While Tesla’s vision to be not just just an automotive company, but an “energy innovation company” is bold, it’s not realistic. It’s when companies try to expand too far from their core business that balance sheets start to get messy. Too high headcounts, acquired debt and poor financing come along with trying to do everything.

In short, the path to market share domination is not vertical, but quite flat. It’s knowing your core competencies and staying maniacally focused on them. Everything else can be achieved through partnership. Ownership is not necessarily needed for control. Apple has proven this method successful, with the highest revenue per employee, growing profits- the list goes on. Tesla should instead look to emulate this Silicon Valley big brother, rather than trying to bail out its literal cousin company from a mountain of debt. So if Tesla wants to become for electric cars what Apple is for mobile phones, they better stick to what they know. But while Tesla attempts the electric car, space travel and now solar power, this is still planet Earth. If you try to defy gravity, you will fall.